According to Bank of America, there is currently a better way to invest money in the stock market. Savita Subramanian, head of U.S. equities and quantitative strategy at the bank, currently recommends investing in the equal-weighted S&P 500 rather than the cap-weighted S&P 500 index because valuations are more attractive. The S&P 500 is up more than 14% this year, even after recent volatility. The S&P 500 Equal Weight Index, on the other hand, is up less than 7%. The valuation of the equal-weighted S&P 500 index is “approaching a record discount,” Subramanian wrote on Wednesday. “Even though mega-caps have led the market lower in the recent decline, the equal-weighted S&P 500 trades at an extreme discount to the S&P 500 and is approaching tech bubble levels.” .SPXEW YTD Berg S&P 500 Equal Weight The strategist expects the equal-weighted benchmark could prove to be a way to capture an extension in the equity performance of the mega-caps that dominated this year’s early rally, especially since she expects earnings — not price-to-earnings — to be the “primary driver” of returns going forward. The S&P 500, excluding the so-called “Magnificent Seven” stocks, is on track to increase its earnings 8% year over year in the second quarter, the first period of growth for the rest of the market since late 2022, she said. Other parts of the market appear to be even better bargains, Subramanian said. For example, the large-cap S&P 500 Equal Weight is 8% more expensive than the small-cap Russell 2000 index for small-company stocks, she noted. But the S&P 500 Equal Weight has another advantage: It is inherently less risky because large caps are easier to trade than the small cap market. That could also help the equal-weighted benchmark perform better. “Don’t forget about risk: The SPW has a lower beta (0.9) than the cap-weighted S&P 500 (1 by definition) and a much lower beta than the Russell 2000’s beta of 1.1,” Subramanian said. “Based on the current equity risk premium, the equal-weighted S&P 500 should trade at a premium to the S&P 500 and at a 12% premium to the Russell 2000, all else being equal.” One way to play the BofA call is the Invesco S&P 500 Equal Weight ETF (RSP).
